A Chinese clerk counts US dollar banknotes next to yuan bills. Photo: AFP/Xu Jingbai/Imaginechina

China needs to keep financial market liquidity stable and regulate its “money gates” to prevent asset bubbles, but it also needs to ensure a lack of liquidity doesn’t cause financial stress, according to a commentary in a newspaper owned by the People’s Bank of China.

Chinese policymakers face a dilemma as they need to tighten credit to contain debt and speculative investment without triggering a wave of defaults that could destabilise the financial system.

The country’s leaders have called for a “prudent and neutral” monetary policy in 2017 and for prevention of financial risk, while keeping the economy on a path of stable and healthy growth, according to statements following a key economic meeting this month.

Monetary policy needs to support economic growth and ensure enough liquidity in the interbank market, but also needs to target price stability and pay attention to asset bubbles, Financial News said in the commentary on Saturday.

Policies should also be more targeted, the commentary said.

“Maintain macroeconomic stabilisation policies, strengthen fine-tuning (of policies), but do not implement big stimulus,” the commentary said, but “explore more targeted ways to solve structural problems.”

The People’s Bank of China has not cut interest rates in 14 months, and as the economy has proved relatively resilient, the central bank has been guiding money market rates steadily higher in an effort to root out speculators.

But tighter liquidity has led to stress in money markets in recent weeks as bonds fell and interbank rates spiked, with markets not calmed until the central bank made a significant liquidity injection.

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